Massive loss. Magang posted a core net loss of RMB1.9bn for 1HFY12 after losses widened in 2Q. The result, which was way below of our and street estimates, certainly stunned the market, especially as there was no pre-warning from the management. The disappointing result can be attributed to, i) weaker sales and the plunge in average selling price (ASP) resulted in a 5.9% drop in revenue, and ii) relatively high iron ore prices, which pared down the EBIT margin to -2.6% compare to 1.9% in
1HFY11.

Near term outlook remains tricky; SELL. We remain cautious on the steel industry, especially since steel prices are again heading south. Although the gloomy economic outlook in Europe as well as China's slowing economy could prompt the government to roll out stimulus measures, the eventual magnitude may be disappointing. Furthermore, Magang's move to expand into flat steel products may result it in having less significant benefit from any stimulus packages, as incentives normally focus on fixed asset investment that drive long steel demand. Meanwhile, management is guiding that losses could potentially extend into 3Q as the steel market remains in recession, with difficulty in rebounding significantly. We are now projecting a loss of RMB3bn in FY12 and a loss of RMB691.2m in FY13. Hence, we are downgrading Magang to SELL, despite the stock having lost some 31% in market value YTD as this shocking result may prompt a potential kneejerk reaction. Our new fair value of HKD1.54 is based on 0.4x FY12 book value or -1.5 standard deviations of its 5-year historical trading range.